Rewards Abroad

President Obama's State of the Union message only serves to reinforce my
forecast that investors will continue to find better returns in markets outside
America and in currencies other than the U.S. dollar. Indeed, the reward gap
may well increase.

Nothing in the President's speech indicated willingness to do the hard work
of cutting spending. Rather, he reiterated his commitment to a costly new healthcare
entitlement and more spending on make-work programs. Only days later, his budget
acknowledged that, even before factoring in the cost of his proposals, the
federal government is unlikely to be in surplus for the foreseeable future.
In response, Moody's has issued a warning that the United States' triple-A
credit rating is not unassailable. In short, the trend set some ten years ago
will continue.

Since 1999, those who invested in U.S. stocks, as measured by the S&P
Index, have lost about half of their wealth, in real terms.[i] On the other
hand, those who invested abroad, measured by the Morgan Stanley Emerging Market
Index,[ii] [iii] have doubled their investments in real terms. This is because
capitalism is flourishing abroad, while being curtailed progressively in so-called
advanced economies, where the projected aggregate growth rate for 2010 is now
only some 2.5 percent. Somewhat optimistically, this assumes no double dip
recession. [iv]

Most of the emerging economies are far less leveraged than those of the advanced
countries and are relatively well insulated from the massive dollar deleveraging
that began in 2007. Crucially, their government spending is geared largely
to infrastructure and far less to expensive government bureaucracy and wealth-depleting
entitlements. Most importantly, even formerly communist governments, like that
of China, have embraced free-market capitalism, while many in the advanced
governments are flirting with socialism.

As the most leveraged of the major economies, America in particular faces
great problems with regard to regenerating consumer demand. Looking at the
future of U.S. stock markets, the following five bearish observations stand
out.

First, it appears that the ruling Democratic Party is out of touch with the
realities of economics. Paying little apparent heed to their sensational defeat
in Massachusetts, President Obama and his Democrat Congress are making no realistic
attempt to rein in, let alone cut, runaway government spending. Yet, the current
path leads to spiking debt costs, huge tax increases, and unprecedented U.S.
dollar debasement. In addition, because many Congressional Democrats were elected
by disaffected conservatives during the Bush years, the party cannot agree
to terms on reform legislation. This leaves businesses fraught with uncertainty
as to how they will be impacted.

Because of the focus on new spending, we have only seen empty gestures with
regard to tax-cutting. This is the ultimate form of "stimulus," but
one that must be earned through reduced spending. While President Obama has
talked tax cuts, his actions indicate only a redistributionist impulse to set
up federal programs for which business and the productive classes must pay.
Whether or not that satisfies his ideological goals, it is a recipe for economic
disaster.

Second, while the Fed has signaled that it will hold interest rates down
for the foreseeable future, it is likely that in the medium and long end of
the yield curve the market will soon force rates higher. This will lead U.S.
bond and equity markets to better reflect their real values, and end the nominal
recovery we have seen thus far.

Third, despite increased government hiring in wealth-consuming jobs, total
employment, and especially private, wealth-creating employment, continues to
fall. [v] Those jobs are moving abroad. Last year, the U.S. witnessed the steepest
drop in demand for H1B visas in recent history. [vi] This indicates that America
is losing its appeal as the place for the world's enterprising young minds
to strike it rich.

Fourth, the Dow has risen at a historically fast rate over the past nine
months, while volume has thinned. [vii] In other words, the rally is being
pushed by speculative traders, not long-term investors. It is, therefore, highly
vulnerable to collapse.

Finally, political uncertainty, rising unemployment, and an outlook for increased
taxes are destroying any looming consumer confidence. Fourth-quarter GDP grew
an annualized 5.7 percent on inventory restocking, but no one is in the mood
to spend. [viii] Consequently, those stockpiles will drag on GDP growth for
several quarters.

With this somber picture at home, it was not naïve to have hoped the
President would shift to a common sense agenda in the State of the Union. Unfortunately,
this Administration may not have the fortitude to implement an austerity program.
One way or another, the U.S. is going to have to face the economic reality;
the longer we wait, the bigger head-start we give to our competitors in the
developing world.

For a more in-depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2008 bestseller "The
Little Book of Bull Moves in Bear Markets" and his newest release "Crash
Proof 2.0: How to Profit from the Economic Collapse."Click
here to learn more.

More importantly, don't let the great deals pass you by. Get an inside view
of Peter's playbook with his new Special Report, "Peter Schiff's Five Favorite
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global investors, and learn about the Euro Pacific advantage, at www.europac.net.

John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.